Stocks Defying the Bear Trend

The unprecedented speed of the 2020 bear market, coupled with the significant impact stemming from the selloff of ETFs and indiscriminate liquidation of stocks regardless of quality, has produced a unique, yet potentially fortuitous, situation for investors. To put things in perspective, the Dow Jones Industrial Average declined by 28.1% between 12 February and 17 March 2020, while the S&P 500 fell 35% from its 19 February 2020 all-time high (according to Bloomberg).

Eventually, however, the extreme volatility in financial markets will subside and conditions will start to normalize, with several industry experts pointing to a likely U-shaped, potentially even a drawn-out W-shaped, recovery curve. Select stocks will then start to rise, providing the opportunity to mitigate past losses. When this happens (the recovery that is, and it will!) and if history is any guide, capital will once more flock back into those stocks that satisfy − in our view – stringent criteria as active managers will start a sizeable rotation of their holdings to position for the market ahead.

Yet, as investors continue to take stock and come to terms with the substantial losses experienced across a majority of listed securities globally, pockets of select stocks − such as in healthcare (see Figure 1), communications and information technology – continue to persist, exhibiting a remarkable resilience to the damage resulting from the COVID-19 pandemic. Not only are they holding up well, some names are trending up.

On that note, to better illustrate my point, we have pulled together a sample list of 36 select global stocks we are actively tracking and that continue to enjoy a rating of A (see Figure 2).

Figure 2: Tracking the Trend

Source: Trendrating as at 14 April 2020

But how can one be fully prepared to identify and capture these hidden ‘gems’?

The prevailing notion is that anchoring investment decisions in traditional fundamental research and thoughtful analysis should suffice to best position investors’ portfolios for potential risks and opportunities in markets. Such a traditional approach, however, may simply be no longer sufficient, especially when the dominance of money flow will likely be exceptional. Importantly, spotting where ‘big money’ will go requires the ability, i.e., the right tools, to be the first one out of the gate and capture trends well before analyst raise the outlook, and long before they become readily evident to the rest of the crowd. As John Stoltzfus, chief strategist at Oppenheimer Asset Management, observed in a recent interview on CNBC’s “Trading Nation”, looking at the current earnings season amidst the COVID-19 pandemic. “It’s going to show us winners and losers within the sectors — companies that may be positioned to weather this better.”

Active managers need to adjust to this increased level of volatility, rapid price stampedes and quick reversals. Risks and opportunities will likely emerge at a much more rapid pace, and reacting quickly to them will be detrimental. As Rocco Pellegrinelli, founder and CEO at Trendrating, observed in a recent interview, “Advanced analytics and new generation investment management technology are required to successfully handle the more challenging market environments we will likely face for the foreseeable future. Importantly, we believe price trend analytics can be applied neatly into any investment methodology, acting as another layer of intelligence and an overlay on a manager’s strategy.”